LONDON (Reuters) - Foreign investment banks must not get a blank check to operate in the EU and should face tighter controls, France has told the bloc’s member states in a document seen by Reuters.

FILE PHOTO: A Britain's and some European flags are hung outside the EU Commission headquarters in Brussels, Belgium December 4, 2017. REUTERS/Yves Herman/File photo

The EU proposed a draft law last December to tighten wholesale market access to trade stocks, bonds, currencies and derivatives for institutional customers in the bloc.

But in a “non-paper” or discussion document likely to send a chill through Britain’s financial sector ahead of Brexit, France said the draft law does not go far enough.

“Even though this is a first useful step, it fails to address the many shortcomings identified in this non-paper,” the document said.

EU financial services market access is granted under the EU’s “equivalence” system, whereby Brussels deems a foreign firm’s home rules to be as strict as those policed in the bloc.

Unless Britain gets the bespoke EU trade deal it wants, its financial firms would have to rely on equivalence after it leaves the bloc next March.

France believes the equivalence system was not designed to deal with a major financial centre like London on the EU’s doorstep. “Equivalence decisions should not be seen as a blank check but should rather continuously be assessed over time, and in a consistent manner,” the paper said.

Paris, Frankfurt, Dublin and Luxembourg are vying to attract banks, insurers and asset managers from London who need guaranteed access to EU customers after Brexit.

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Making it harder to serve EU customers from Britain piles pressure on UK-based firms to set up in the bloc. Japan’s Nomura (8604.T), which has conducted European business from London, said on Friday it had been granted a securities trading licence in Frankfurt.

Non-EU investment firms should come under the “shared competence” of their home supervisor and the bloc’s securities watchdog ESMA, the French paper said.

This would ensure equal treatment of EU and foreign firms, and allow the bloc to check that market integrity and investor protection are being upheld. It echoes EU plans to scrutinise foreign clearing houses more closely as a condition for market access.

EU states and the European Parliament have final say on the draft law. France is seen as taking a hard line on equivalence compared with other members states like Luxembourg who are more accommodative.

Non-EU investment firms should be required to set up a branch in the bloc by registering with ESMA, the paper said.

Foreign trading platforms should be required to set up as fully-fledged subsidiaries in the bloc, meaning they would be directly supervised by EU regulators.

“Likewise, the operations of certain bank-like services (dealing on own account and underwriting or placing financial instruments on a firm commitment basis) could be taken out of the scope of equivalence,” it added.